I’m so confused. Should the 4% rule be the 3% Rule to get a similar result? Also, I take issue with calling withdrawals “income”. It’s a distribution of savings, not really income since it’s already in your account. I understand that tax deferred will be counted as income by the IRS, but it was already earned. “Withdrawal” or “Distribution” is more precise.

In the chart shown at 10:29 elapsed time, the income (i.e. withdrawal amount) makes no sense for the 95% rule. Classic 4% withdrawal on $1M = $40K, as shown on the left. Then look at the withdrawal amount ("income") for the 95% rule. $76.4K withdrawn? Why would someone apply a 7.64% withdrawal rate, if the portfolio was worth the same $1M?

What’s with the deliberate use of falsetto at various points?

Enjoyed this video, great content and well explained!

@NextLevelLife

2 жыл бұрын

Glad you enjoyed it!

Thank you for this video. Very informative! How do you think this 95% rule compares to something like an Endowment strategy?

@andrewb9595

2 жыл бұрын

I'm still waiting for the endowment strategy video as well. Hopefully he'll release that one in the next few months.

@NextLevelLife

2 жыл бұрын

Rob, I'm glad you found the video informative! Endowments serve a very specific purpose so they tend to have tweaks that may not be all that relevant to any individual investor. But to answer your question I suppose it would depend on the specific endowment strategy used as well as things like the asset allocation within the endowment. Most endowments have spending policies that are similar to the 95% rule (in the sense that they use a percentage-of-the-current-endowment-value approach to help determine withdrawals) but there are some differences between each policy so that would make some difference in the exact outcome (mainly in the withdrawal rate they target and how they tweak the percentage-based approach to serve the goals of the endowment, see below). For instance, based on what I could find while researching, Yale's endowment fund withdraws an inflation and tax-adjusted amount equal to the sum of 80% of the previous years withdrawal and 20% * their targeted safe withdrawal rate (currently 5.25%). They also have a hard spending ceiling and floor on their withdrawals (currently 4% and 6.5% of the endowment's value). In addition to providing some inflation-related adjustments (that the 95% rule lacks), these rules help them smooth out the variation in their year-to-year withdrawals to a degree (which is helpful for a University since their spending needs tend to be fairly "sticky" compared to a regular investor). However, since they aren't as aggressive in terms of capping their income losses year-to-year as the 95% rule there certainly is more downside potential there if the endowment's investments take a huge hit. On the bright side, this may allow the endowment's value to recover from bad years faster, all else being equal (since they'd have withdrawn less than the 95% rule would've had them withdraw during those tough times). It also ensures that they are not favoring any specific crop of students over the others (they refer to this as intergenerational neutrality and its a goal that the 95% rule was not built to address since it was made for individuals and not endowments). A potential downside to type of approach is that since they're using a percentage-based approach to their spending ceiling/floor and are targeting a fairly high SWR (5.25% vs the more standard 3%-4% that most of us regular investors would shoot for) there's added pressure to generate high returns in order to maintain their withdrawals on an inflation-adjusted basis (assuming an inflation rate of 3%/year the endowment would have to earn roughly 8.25% per year just to hold steady). If they manage to generate high enough returns (which thus far they have) their income metrics would stack up quite well compared to most other withdrawal strategies such as the traditional 4% rule (which is fairly common for strategies that use more aggressive allocations and the value of the nest egg to determine withdrawals), but if they don't... then not only will their income metrics suffer, but they run the risk of eventually having to deviate from their withdrawal rules to put food on the table (or, in the case of the endowment, build new buildings, fund departments, or whatever it is the endowment was going to be used for at that point). So in summary, in terms of income it would depend on how the investments perform and the specific tweaks used by the endowment. We saw that the 95% rule can struggle a bit when experiencing extended downturns. An endowment strategy would struggle similarly, but may have some tweaks that allow them to recover quicker on an inflation-adjusted basis (usually at the cost of sharper cuts to income initially) and therefore produce superior overall income generation over the long-term. This is great if you need your money to last you a while, but not so great if you end up passing away before you've had a chance to catch up on that lost income. In terms of risk both would behave similarly if you were able to follow the rules throughout the drawdown period. However, since the endowment may have tweaks that may it less aggressive at preventing year-to-year income drops than the 95% rule it may not see its total value fall as far (assuming you were able to handle the sharper income cuts, obviously). In terms of the stability/predictability of income I think it largely comes down to personal preference/situation. On the one hand the 95% rule likely wins out in terms of capping income drops compared to most endowment funds which could be helpful to those with less wiggle room in their budget or those who don't need their money to last them too long. On the other, both approaches will see frequent income cuts due to the volatile nature of short-term investment returns and the 95% rule would likely see more frequent cuts on an inflation-adjusted basis than an endowment fund due to the lack of an inflation-adjusting tweak (something that most endowments take into account). In terms of buying power, it would depend on the specifics. However, if we're talking long-term, then assuming you used the same withdrawal rate and allocations for both approaches, the endowment approach would likely win out in the end due to its quicker recoveries from downturns. I hope this answers your question!

@NextLevelLife

2 жыл бұрын

Research has been done and the spreadsheet has been built! Haven't gotten around to writing the script quite yet though... so not likely coming this year. On the bright side, since the spreadsheet is built I'm able to run the simulations now. In my response to Rob above I compared the Yale Endowment approach to the 95% rule. You may find the comparison interesting in the mean time :)

@andrewb9595

2 жыл бұрын

@@NextLevelLife I love that you take the time to give such detailed responses to your viewers. That's one of the reasons this my favorite KZread channel.

@rob9990

2 жыл бұрын

@@NextLevelLife Great information! Thanks so much for the detailed reply. I can't wait for the full comparison!

I’ve wondered about a possible modification to the 4% rule. What happens if in any year that the market increases enough you reset your withdrawal to the new larger 4% value. That is, the larger of your correctly inflated value, or the new 4% value. It would be as if you reset your retirement date to the higher value starting point. Also, I can’t see how the 4% rule works with a SS start date after you retire. That would mean you get a huge bump in income when you do take SS, which would be the opposite of a go-go retirement phasing. Is there a meaningful rule of thumb of how to split the 4% for before and after taking SS-Like a 6/3% rule?

@NextLevelLife

2 жыл бұрын

Ken, I'll admit resetting your withdrawal value periodically depending on market performance is a thought that's crossed my mind a few times as well. Though at this point in time I've never taken the time to run simulations on it so I can't say for sure how it would compare to the other approaches out there historically. It's certainly something I plan on doing at some point, though as it is interesting :) As far as the social security part goes, I'm not aware of any rule of thumb that specifically accounts for it in the way that you describe (that doesn't necessarily mean one doesn't exist... I'm just not aware of any). The 4% rule is meant to be a rule of thumb to give you an idea of how much income an investment portfolio would be able to sustainably produce over a specific time-frame (usually 30 years). Obviously, with social security the income from your nest egg would only be part of your total income. For those that won't be able to take social security for the first few years of retirement there are a some options you could consider. Here are two that come to mind off the top of my head: First, you could run simulations based on the time frame you need a certain portion of your money to last based on your asset allocation in order to figure out a new Safe Withdrawal Rate. For instance, if you were retiring at 55 and didn't want to take SS until you turned 70 (and you wanted to have at least $500k in your investment portfolio when you were 70 to make up the difference between your SS income and your lifestyle costs) you could run simulations to determine what a 15 year safe withdrawal rate would be under those assumptions. Second, if you only have a few years before you plan to be taking SS you could simply build up a cash fund (or keep the money in some safer investment vehicle) that could bridge the gap between your pre-SS retirement years and when you start taking SS. There are likely more approaches you could take to handle this situation, but those are a couple that came to mind when reading your comment.

@kflowers

2 жыл бұрын

@@NextLevelLife I look forward to a future video on the topic. Together, this and the SS topic are only validation models-sanity checks if you will. I feel more comfortable running more detailed budgets through a Monte Carlo. It lets me check how sensitive my plan is to changes. But is nice to use the rules of thumb to make sure I didn’t miss something stupid. Thanks for your content.

The 95% rule makes sense as an alternative to financial guardrails. In any case, it's a good way to check to insure you won't run out of money.

@NextLevelLife

2 жыл бұрын

It certainly is a low risk approach as long as you can follow the withdrawal requirements of the rule all the way through to the end :)

I can see the appeal of the 95% rule although I'm not a huge fan of the possibility of a 50% cut in income in a bad market especially if not accounting for inflation. I can see this easily being modified by including inflation in the calculation or guardrails to limit how low your annual income can go regardless of market performance.

@NextLevelLife

2 жыл бұрын

Understandable. Though as I said the income cuts experienced in the hypothetical example during the Great Depression was pretty extreme due to the fact that it was the worst stock market crash of the past century and the investor was using an all-stock portfolio. Most retirement periods wouldn't have experienced cuts to nearly that degree using the 95% rule. It also would've taken several years to get to that point due to the fact that your income is only being cut by (at most) 5% each year that the markets struggle ;) Thanks for sharing!

The 4% rule that I'm familiar with is: On the year you retire you take 4% of your portfolio. Your portfolio is a 60/40 stock/bond portfolio. Each year your income gets the cola based upon inflation. This withdrawal strategy has a 95% chance of surviving a 30 year retirement period. 4% deemed as the maximum safe withdrawal rate. this seems to be a little different than the 4% rule as presented here.

@NextLevelLife

2 жыл бұрын

Ralph, you're right the 95% rule is a bit different than the traditional 4% rule originally proposed by William Bengen (which you described accurately). The 95% rule is more like a modified fixed percentage withdrawal strategy. The traditional 4% rule would be described as an inflation-adjusted withdrawal strategy that just so happens to be known colloquially as the 4% rule due to that being the maximum safe withdrawal rate found by Bengen in his studies :)

@theedj007

2 жыл бұрын

I think the difference is the 4% rule as presented here is different than the way that @Ralph Parker and I have learned it. If the first year you took out $40,000 because that was 4% of the total savings, the second year you would not recalculate 4% of your remaining savings, you would simply take out $40,000 modified by inflation over the previous year, so for example it might be 2% higher than it was the previous year. So even if your savings had fallen by 20%, you would now be withdrawing $40,200. The 4% is only ever calculated once, and then thereafter you always withdraw the same amount as you did the first year, but corrected for inflation in the intervening time.

@giraffe-fan8797

2 жыл бұрын

@@theedj007 You'd withdraw $40,800 year 2 (2% higher to account for inflation 40,000 * 1.02 = $40,800).

Good info and viable strategy

@NextLevelLife

2 жыл бұрын

Glad you liked it :)